Apr. 26, 2011: More condo vs. single family explanation; QRM conjecture; reader input on "ability to repay"
Rob Chrisman

The trivia for the day is, "Your tongue is the only muscle in your body that is attached at only one end." I bring this up because there will be plenty of them wagging at the MBA's Secondary Marketing conference next week about Qualified Residential Mortgages. The proposals are being commented upon (until June 10), and nothing is set in stone, but that doesn't, and won't, stop industry folks from conjecturing and asking investors about it. And investors next week, dressed in blue and gray suits, will all nod their heads and say, "Yes, it is very complicated and could have major implications. But our staff is looking at the data and analyzing our recent production to see the impact of it, and nothing has been decided."

I would suggest that few, if any, investors know any answers yet, given the over-300 pages of details about keeping "skin in the game" regarding securities backed residential, commercial, credit-card, etc., loans. On the residential side, my guess is that investors are taking their time looking at all the pieces - production, underwriting, the secondary/investor markets, and trying to see a) how this would impact them, b) how it will impact the industry, and then c) come up with potential suggestions that would improve the regulations. The whole QRM idea is not bad in itself, and there are plenty of "sponsor" institutions with the liquidity to hold 5% of some portion of their securitized mortgages, but the potential ramifications and cost to the borrowers will have to be sorted out. Will holding the risks lead to higher rates and fees for a subset of borrowers? Sure it will. And what happens when Fannie & Freddie come out of conservatorship? And what will be the impact of limiting fees on smaller loans, many to borrowers stretching from Nevada to West Virginia? So although this will be a topic of conversation at next week's convention, hopefully no one is looking for definitive answers.
 
The “ability to repay” proposals are also open to public comment. Here’s one salty note that I received: "I've been an underwriter for over 18 years, but there's a job at the local Sonic Burger I'm thinking about taking. Now we have, thanks to Dodd Frank, 'the Federal Reserve Board proposed a new rule under Regulation Z that would require creditors to determine a consumer's ability to repay a mortgage before making a loan and establish minimum mortgage underwriting standards.' Are the members of the FRB all on crack?  FNMA, FHLMC, FHA, and VA all have standardized underwriting criteria - and we want to do away with the agencies?  These entities always have had standardized underwriting criteria.  That was a large part of the original purpose of the organizations.  You know that if you are in NYC, or Miami, or Beaver Balls, Montana, the same basic standards apply.

Now the standard is:  2 years tax returns (verified by 4506T), W-2s, recent pay stubs to cover 30 days (with verbal verification of employment within 10 days of closing) 2 months bank statements to verify funds to close and reserves, proof of liquidation of funds to close, copy of driver's license and verification of SS#, a credit report with 4 trade lines, and FICO scores, and a list of other things.  What does the FRB think all this stuff is?  The underwriting criteria in place are more than sufficient to qualify an individual for a mortgage loan.  If the Big Banks and Wall St. had not initiated loan programs that deviated from the above, we would not be in the mess we are in.  We don't need an addendum to TILA to require income and asset verification."

Another wrote, "As an underwriter, job stability is important. I think there is a bright side to Dodd Frank: no loans for anyone who has to run for office every two years. My company certainly does not want to be sued because we made a loan to someone who becomes unemployed as the result of losing an election. We would not make a member of the assembly or senate a loan under any condition that required their income from that position to make repayment - too risky. We are only permitted to make loans to folks that we are relatively certain can repay. Elected officials do not qualify."

In the myriad of mortgage lawsuits, Bank of America received some good news in the form of a lawsuit that was dismissed. It was brought by investors who bought mortgage-backed securities sold by Countrywide (purchased almost 3 years ago by BofA – the gift that keeps on giving). “U.S. District Judge Mariana Pfaelzer granted Bank of America’s request to dismiss the claim against it on grounds that it can’t be held liable for actions of a unit…the investors failed to show that two separate transactions in 2008, whereby Bank of America, through a subsidiary, acquired and transferred the Countrywide assets, were a “de facto” merger.” http://www.bloomberg.com/news/2011-04-22/bank-of-america-wins-dismissal-of-countrywide-securities-claims.html

"Dear Real Estate Dictionary - what is the main difference between buying a condominium versus a single-family home?" It is the type of ownership you receive. With a condo, the owner owns the exclusive right to the interior space of her dwelling unit, but the land, walls, grounds, fences and facilities are owned in common with the other owners in the complex. With a SFR the borrower is the sole owner of the building and the land it sits on. This is "fee simple" ownership. Lines blur slightly when condos are detached, or homes are attached.  (Attached houses where the land is individually owned are termed PUD's.) Townhouses are most often an architectural style of building which include no neighbors above or below, often has a small fenced yard, low maintenance lifestyle (since the HOA may cover roof repair and replacement, exterior maintenance, common area maintenance, and other expenses), and often include amenities such as a community pool.

Townhouses can be either "condo" or "fee Simple." If one owns the land under one’s unit, it is fee simple, if you do not it is a condominium. Lenders and borrowers usually rely on the preliminary title report to know for sure. In the last year or two condominiums, townhouses, etc. have suffered dramatic price declines, especially in states like Florida and Nevada, and LO’s have tried to turn to FHA financing. Most LO’s have found that if their client needs an FHA loan and does not find an approved condominium they like, finding them a "fee simple" townhome, with no FHA-approved-condominium issues, is one solution since it is just like buying a single family home. https://entp.hud.gov/idapp/html/condlook.cfm

Josh B. from Sente Mortgage writes, "One thing that you may want to caution your viewers on regarding the HUD condo approval website is that you still need to make sure and get a condo questionnaire in order to check the owner occupancy.  It needs to be 51% owner occupied or higher.  We had an issue with a condo that wasn’t FHA insurable even though it was HUD approved because it was 48% owner occupied."
 
What are the markets doing? Not much. Monday was very much a “ho-hum day”, with current coupon (i.e., where production is these days) MBS prices starting off better by .125 and finishing the day better by .250, and the 10-yr up about .250 and closing at 3.36%. Traders reported a very, very light mortgage origination day, and Tradeweb reported MBS volume at less than 50% of the 30-day average (the second lowest level of the year). Remember that we’ve had Good Friday, Easter Monday (in many countries), and holidays in parts of Asia and the UK (have you bought your replica of the Royal Wedding Ring yet?) coming up.
 
Looking at our biz, yesterday we learned that New Home Sales in March jumped 11.1% to 300k from an upwardly revised 270k, previously reported at 250k, but are down 22% from a year ago. The number was greater than expected, but remains weak and just above the historic low of 270k and well below a "normal" level of in the 700k area. Better weather conditions reportedly was a factor in the uptick with possibly some support related to looming increases in FHA financing costs that took effect on April 18. The median home price was $213.8k, down 4.9% from a year ago, and we’re looking at about a 7 month supply, down from 8 months reported last month. There were 183,000 new houses on the market at the end of March, the fewest since August 1967, indicating builders are reducing construction. So housing continues to be slow, and refinancing is right along with it given the tight underwriting, increased financing costs, poor home valuations, and a weak jobs market. Folks are waiting for a good chunk of the foreclosed properties to be absorbed, home values to start to recover, and credit standards to ease.
 
We do have some news today, although the press seems very focused on Ben Bernanke’s Q&A tomorrow. The man knows how to answer questions, so not only don’t look for any change to overnight rates, but don’t look for too many surprises from his press conference. We will have the release of yet another house price indicator, the S&P Case-Shiller Housing Price Index, at 9AM CST we’ll have Consumer Confidence for April, and then at 10AM CST a $35 billion 2-year note auction. The market is indeed flat from Monday afternoon, with the 10-yr sitting at 3.36% and MBS prices about unchanged.
 
 
Boudreaux, the smoothest-talking Cajun in the Louisiana National Guard, got called up to active duty.  Boudreaux's first assignment was in a military induction center.
Because he was a good talker, they assigned him the duty of advising new recruits about government benefits, especially the GI insurance to which they were entitled.
The officer in charge soon noticed that Boudreaux was getting a 99% sign-up rate for the more expensive supplemental form of GI insurance.
This was remarkable, because it cost these low-income recruits $30.00 per month for the higher coverage, compared to what the government was already providing at no charge.  The officer decided he'd sit in the back of the room at the next briefing and observe Boudreaux's sales pitch.
Boudreaux stood up before the latest group of inductees and said, "If you has da normal GI insurans an' you goes to Afghanistan an' gets youself killed, da governmen' pays you beneficiary $20,000.  If you takes out da supplemental insurans, which cost you only t'irty dollars a mons, den da governmen' gots ta pay you beneficiary $200,000!
"Now," Boudreaux concluded, "which bunch you tink dey gonna send ta Afghanistan first?